A critical part of the due diligence conducted before a buyer acquires the stock or
assets of a target company is a review of the employee benefits offered and
maintained by the target company. The objective of employee benefits due diligence
is to identify all of the potential issues and liabilities associated with the target’s
employee benefits and to adequately address these issues in the acquisition
agreement.
Stock Purchase vs. Asset Purchase
If the acquisition is structured as a stock purchase, the target company’s employees
will not have their employment terminated and the buyer will automatically inherit all
of the target company’s employee benefit plans. This is advantageous because
termination of employment often triggers payments to the employee under employee
benefit plans. Due diligence is important in a stock purchase in order to identify the
types of employee benefit plans the target company maintains, to determine whether
the plans have been maintained in compliance with their terms, and applicable law,
and to establish whether there are any potential issues relating to the employee
benefit plans.
If the acquisition is structured as an asset purchase, the buyer has the flexibility to
choose the assets and liabilities it wishes to acquire, including the employees and
employee benefit plans. In an asset purchase, the target company’s employees’
employment with the target company will terminate, which creates additional issues.
Due diligence is important in an asset purchase in order to assist the buyer in
determining which employee benefit plans, if any, the buyer is willing to assume.
What to Look For
The following is a general list of the types of documents a buyer should request and
review as part of due diligence, as well as a brief description of the information that is
relevant to the acquisition:
• Employment, Change-in-Control, Retention, and Severance
Agreements: These agreements should be reviewed to determine whether
the employee is entitled to an